Monday, November 30, 2009

For subprime, is it deja vu all over again?

I know, I know. Subprime is so, like, 2007. And most of the financial press has moved onto sexier mortgage words like “option ARMs,” or “FHA loss reserves.”

That said, I thought it would be interesting to dive back into subprime waters, taking a granular look at individual deal performance using November remittance data from that old standby, the ABX. (For those that don’t recall, the ABX index was launched by Markit in 2006 to track the private-party subprime RMBS market — and it allowed some hedge funds an easy mechanism to short the market for subprime mortgages.)

We decided to take a look all 81 different deals across the 2006 and 2007 vintages within the ABX, comparing month-to-month percentage changes in both 60+ day delinquencies (not yet in foreclosure) and properties in foreclosure status.

What we found is a telling picture of a subprime market on hold, but far from reaching a bottom. Blue bars represent month-over-month trending in 60+ day delinquencies for each of the 81 deals, while red bars represent month-over-month trending in foreclosures.

Click the image to see full-size version

Because this sort of chart technique might be foreign to some readers, the zero axis point represents no change between October 2009 and November 2009 data. Any data points in positive territory reflect a percentage increase month-over-month, while data points in negative territory reflect a percentage decrease month-over-month.

Surprised? Only if you thought the subprime mess was over with.

What’s beyond clear here is that the volume of 60+ day delinquencies is almost universally on the rise, while foreclosure volume is far more erratic and more likely to be on the downswing — the effect of various government programs designed to prevent foreclosure at all costs, while unemployment continues to take its toll on borrowers’ ability to pay their mortgage. That effect can be seen even more clearly in declining REO inventories tied to these 81 subprime deals, below.

Click the image to see full-size version

Right now, securities holders have benefited somewhat from a modest rebound in prices, and banks have booked some market gains on the increased valuations assigned by trading activity in their Q3 earnings. But this data seems to suggest pretty plainly that any such gains might best be interpreted as transient — unless you believe that the Federal balance sheet has ample room to absorb an increasing number of troubled borrowers.

In either case, I don’t see a backup in 60+ day delinquents (subprime and elsewhere) as a sign of clear market recovery for housing or mortgages. And it’s precisely this growing backlog of newly-troubled borrowers that has me scratching my head when the NAR blindly projects a 4 percent gain for home prices next year. I’m very positive on the ability of our housing and mortgage markets to emerge stronger, but that’s a long-term sort of outlook. Don’t be fooled in the short-term by what John Mauldin has taken to calling The Statistical Recovery.

For subprime mortgages, it appears Yogi Berra was right: this really is like deja vu, all over again.